Digital transformation is costly and complex. It is not an easy journey. It requires commitment from the CEO to reimagine business models, build new strategic alliances and develop a strategic digital workforce. It requires a new model for IT that simplifies and transforms IT operations.
But more than anything, it requires organizations to quickly respond to change – it requires urgency. It’s a matter of disrupting or being disrupted.
According to MIT Sloan Management Review, the biggest challenge with digital transformation is the lack of urgency.
While according to Gartner, only 30% of digital transformations will succeed. The real victors in the digital business transformation will be those organizations that can envision a different future.
Failure to realize the transformational potential of digital business is an issue at companies where senior leaders cut their teeth on models that are no longer working. According to George Westerman, Research Scientist with the MIT Sloan Initiative on the Digital Economy and co-author of Leading Digital: Turning Technology into Business Transformation. “If they think the retail experience of the 1950s is still relevant, then that’s what the customers will get.” The Apple Store didn’t improve upon the retail experience. It reinvented it.
Cisco CEO John Chambers told business leaders at a Wall Street Journal conference in early 2015 that “40% of the companies in this room won’t exist in a meaningful way in 10 years unless they change dramatically.”
The Power of Digital
But there are many companies that understand the urgency and have unleashed the power of digital transformation. They are changing the rules. They are finding inefficiencies and demolishing them.
A great example is Monsanto Co, a $15 billion agrochemical giant. It has mapped every one of the nearly 30 million farming fields in America and chunked them into a smart phone app that overlays soil and climate data. It mixes in lab data about optimal growing conditions for each of the thousands of varieties of seeds that it sells. Then it folds in real-time data like weather forecasts.
The result is a tool that farmers can use to determine precisely when to plant, how much to water and what kind of fertilizer to apply. It keeps them up to date on nearby insect infestations and can tell them the optimal time to harvest.
Monsanto knows that in agriculture, a few days or degrees can make the difference between bounty and bust.
There are things organizations can do right now for this digital transformation. To start, they need to embrace new security, cloud, mobile, social and analytic technologies.
Organizations also need to work on trust. There is a certain level of data and information that customers will share with you. You need to figures out the comfort level and how you can maximize that relationship.
On the flip side? You have to protect data as one of the most important assets. As soon as your customer loses trust in you, you lose brand equity and you can go out of business.
Look at Netflix. They create new content from scratch because they’ve used data from their customers to create customer content that is now disrupting things like HBO. They are disrupting because they get more data and insights from their customers.
Netflix is an example of rethinking business models that find ways to drive out inefficiencies and leverage technology and data analysis to disrupt.
Digital business is expected to transform businesses at nearly every level, including:
1. Customer-Facing Applications
No area of digital business gets executives more excited than the idea of improving the customer experience and identifying new sources of revenue. They are the core to driving the innovation and adoption of the Internet of Everything (IoE).
Your customers are already digital disruptors. If you haven’t transformed your organization to meet your customers’ needs, then you are already behind.
A 2014 McKinsey survey of 850 business leaders found that more than one-third expect at least 15 percent of their companies’ growth in the next three years will be driven by digital initiatives, led by applications in customer engagement, followed closely by products, operating models and business models.
For most companies, the most immediate benefit of big data analytics is to segment customers into fine-grained groups based on behavior and create “markets of one,” in which promotions and even prices are customized to individuals.
A Day in the Park
At Six Flags Entertainment Corp., the company is redefining the theme park experience across multiple axes in its 18 destinations, reducing operational costs while minimizing customer frustration due to lines and delays. To cut down on wait times, the company introduced a ride reservation system and fingerprint scanners for season pass holders. Coupon booklets are now electronic so the company can track patterns as fun-seekers traverse the property.
“The big objective is to communicate to people as they’re going through the park,” says CIO Michael Israel. So a customer heading for the exits at 5 PM can be offered a dinner coupon via mobile phone along with a reminder to attend the evening’s big firework show.
Six Flags has also built a sophisticated resource management system that taps into real-time and climactic data to optimize its most important resource: people. If an approaching storm or cold front threatens to send water park patrons to other areas of the park, Six Flags can redeploy people, equipment and catering resources appropriately.
Analytics can also yield insights that lead to new lines of business. Leading Digital tells the story of Asian Paints, India’s largest paint company. By analyzing customer comments, Asian Paints learned that most complaints weren’t about its products. They were about the way they were applied. With this knowledge, the expanded into selling finished painted surfaces. The result? Customers who buy painted walls rather than cans of paint are happier because the final product looks better.
2. Supply chain
Because digital makes things move so fast, you may not have to build everything in your own organization. Procurement has historically been a labor-intensive and expensive process. For that reason, companies tend to do business with a small number of suppliers and negotiate prices infrequently.
New online marketplaces are changing that dynamic by offering greater flexibility and the power to discover new products and continually seek out more attractive pricing options.
Mercateo AG is a new breed of e-commerce hub that addresses B2B buyers and sellers. The European marketplace aggregates more than 10 million products from more than 15,000 manufacturers, enabling buyers to browse catalogs and place orders instantly.
Online marketplaces vastly increase buyer choice. By automating procurement to continually scan for new and better products, companies not only reduce costs but they continually revise their inventories.
The Essen, Germany-based grocery chain Aldi constantly scans digital exchanges looking for bargains from suppliers and discovering new products to offer as weekly specials. Aldi is thus able to undercut traditional grocery chains, with their high fixed costs and giant inventories, while delivering a unique retail experience.
Auctions can now become part of the procurement process, enabling companies to continually seek the best prices and services. “This enables you to put everything through procurement every time,” says Andy Mulholland, an analyst at Constellation Research. “Digital business means using digital marketplaces both to buy and sell.”
3. Back-office operations
Software-as-a-Service is changing the way businesses think about operations. Non-strategic functions that were once necessary to keep the company running can now be outsourced to cloud service providers that provide superior tools and best-of-breed expertise.
IT operations are the most dramatic example of how this trend is playing out. Instead of incurring the large capital expenses of building data centers and buying equipment and software, companies can now rent those services online, paying only for the resources they use. Cloud infrastructure providers offer superior economies of scale and world-class operations along with a portfolio of rentable software.
And cloud infrastructure isn’t just for small businesses anymore. Netflix, Inc., which by some estimates accounts for up to 25% of all Internet traffic, outsourced its entire IT infrastructure to a service provider in 2012.
The Evangelisches Krankenhaus Königin Elisabeth Herzberge (KEH) hospital in Berlin offers an example of the benefits companies can now realize by outsourcing IT to the cloud. KEH, which is the largest non-public hospital in the Berlin-Brandenburg Metropolitan Region, moved its operations to the Cisco Unified Computing System cloud in 2013.
In addition to seeing 100% uptime, the hospital has cut server-provisioning times by up to 90% and slashed server management overhead by half.
Those same economics are now coming outside of the IT arena. Accounting, human resources, customer service, billing and procurement are just a few of the operations that can now be provision from the cloud. “In any situation in which the business process is well known and can be applied to a lot of people, the cloud will be a good option,” says Charles Babcock, author of The Cloud Revolution.
The benefits of provisioning services from the cloud are beyond cost savings. Application service providers bring expertise that would be impractical or impossible for companies to develop internally. In regulated industries, for example, service providers can navigate constantly changing rules that would require a dedicated staff of attorneys for a company to monitor internally.
4. Smart Production
IoE unleashes massive new opportunities for businesses. It improves operational efficiency while virtually eliminating downtime.
Sensors embedded in everything from oil wells to welding torches, which alert operators of impending failures, permitting them to intercede. Smart environmental controls cut energy costs and are already launching new companies that sell managed heating, ventilation and air conditioning services. Gartner expects the number of installed intelligent devices to reach 26 billion by 2020, a 30-fold increase from 2009. Cisco expects there’ll be twice that many.
Sensors also improve quality control by detecting faults on the assembly line.Stanley Black & Decker uses a wireless network, sensors barcode readers and mobile computers to instantly track changes on the production line and adjust in real time instead of waiting for end-of-shift reports. Factory uptime was previously 78%; now it’s 97%.
IoE also creates competitive advantage. According to the Wall Street Journal, at Harley-Davidson’s York, PA manufacturing facility, the time needed to retool for a new motorcycle has dropped from 21 days to six hours. Harley has been able to dramatically reduce the size of its workforce at the plant, while quickly responding to changes in demand. They even produce customized motorcycles.
In addition to the operational benefits, the combination of IoE data with predictive analytics enables businesses to sell ‘outcomes’ rather than inputs.
For example, an engine provider can sell a truck fleet owner a guarantee that the big rigs will be on the road a certain number of total hours each month. A delivery company can promise different levels of on-time performance and charge more for higher guarantees.
Businesses are increasingly able to sell outcomes. They are becoming more adept at analyzing historic performance and instrumenting people and equipment to enhance performance and predictability.
They are also able to customize products to individual customer behaviors rather than demographics. The cloud services model is thriving because customers only pay for the resources they use. But the same concept can be applied elsewhere.
For example, Progressive Insurance offers some customers the option of attaching sensors to their cars. This allows the company to monitor their driving performance and price policies. This capability has been routine in utilities and other metered services for years, but IoE will extend it in unimaginable ways.
“We now have the information to take our markets from millions to individuals,” says Westerman.
Successful digital businesses are built on top of core competencies, often in the form of information services that complement existing lines of business, according to Westerman.
An example is Tokio Marine Holding’s One Day Auto Insurance offering. Developed for urban drivers who don’t own cars but still occasionally drive, the service offers protection by the day with the ability for customers to sign up from a mobile app. By automating the setup work that has historically made insurance so labor-intensive, Tokio Marine was able to envision an entirely new product.
The Bottom Line
CxOs that will disrupt and thrive must accommodate the need for rapid business change, even if it disrupts their priorities. “If they’re focused on ITIL they’re lost,” quips futurist Thornton May, referring to Information Technology Infrastructure Library a time-consuming IT practices and governance methodology.
A lot of work still needs to be done for CxO’s and companies to recognize the potential of digitalization. Accenture surveyed 1,400 business leaders and found that 73% “have yet to make any concrete progress in realizing the potential of the technology. While 88% said don’t fully understand the underlying business model” of digital business.
The key question is: Are you ready? Are you ready to capture the value from the Internet of Everything and digital transformation?
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